Charlemagne

Unfree trade

The European Commission is flirting dangerously with protectionism

“FREE trade, yes. Disloyal competition, no. Europe that opens all its public-procurement markets when others do not open them at all—it's no.” Thus Nicolas Sarkozy, the French president, in a markedly protectionist campaign speech earlier this month. Less than a fortnight later, the European Commission has snapped its heels. It has issued a proposal to let the EU close its public-procurement markets to firms from countries that exclude European competitors from their public contracts. Like Mr Sarkozy, Eurocrats insist that this is not protectionism. It is, rather, creating a lever to prise open closed markets. The proposal has been a long time coming; if the commission had to postpone every initiative because of an election, it could never do anything. Yet many still see this as a campaign gift to Mr Sarkozy.

France's Socialists will not denounce it. But liberals, especially Britain and other north Europeans, are aghast. Everybody knows that Mr Sarkozy dislikes free trade. What dismays them is that the commission should abandon its role as a force for open markets. Germany, usually careful to stay close to France, said in a scathing private paper that “the proposal is unacceptable and should be rejected.” It notes that Europe can hardly argue against “buy American” restrictions while adopting “buy European” ones.

One reason the proposal got past the commission was an unholy alliance between Michel Barnier, the French single-market commissioner, and Karel De Gucht, the Belgian trade commissioner. Whether it passes the Council of Ministers, representing national governments, is another matter. Mr De Gucht says Europe must deal with the world with less “naïveté”. Its competitors resort to means fair and foul to promote their interests. It is time for Europe to play rough.

His first move last year was to propose restricting the number of poor countries benefiting from unilateral trade preferences. The next is to take on the large public-procurement market, which often accounts for as much as 15-20% of GDP. Some 40 countries have signed up to the government-procurement agreement (GPA) to open public contracts. About €350 billion of EU contracts are open to foreign bidders, twice as much as in America and 13 times as much as in Japan. More seriously, China is not a signatory, despite years of negotiations.

Yet the commission's idea of threatening to exclude tenders that contain more than 50% of goods and services from foreign countries not covered by GPA or other accords still looks unwise. Free trade benefits countries that open their markets by promoting productivity. In public procurement, citizens and governments benefit from cheaper foreign bids that save public money. It seems perverse, at a time of stringent austerity, for countries to deny themselves a means of controlling spending. The plan puts the interests of producers above those of consumers and taxpayers. And if it provokes retaliation, even the producers will not in fact be protected. The EU is already close to a trade war with China, and much of the world, over its proposals to charge foreign airlines for carbon emissions. It has also joined forces with America and Japan to take China to the WTO over restrictions on exports of rare-earth minerals.

“We know that economics textbooks say free trade is good for us,” says one Eurocrat. “But this is also about politics.” And the political context is that Europe is weakened by the euro crisis and threatened by the rise of emerging powers. With a big trade deficit, France blames competition from emerging markets for deindustrialisation and délocalisation, the shifting of factories out of the country. It is supported by its Club Med allies, including even Italy. (The liberalism of Italy's technocratic prime minister, Mario Monti, does not, it seems, yet extend to external trade.)

It is a bizarre proposal, given that European economies would like to export their way out of trouble—taking a leaf out of Germany's book. And it runs against the thrust of Europe's response to the euro crisis, which is to boost competitiveness, not to coddle inefficiency. Worse, the commission's proposal is that it would not only give Brussels power to close parts of the market, but also allow national governments, municipalities and other bodies to shut out some foreign bidders (though only with explicit support from the commission). This would apply to contracts above €5m with 50% foreign content. Countries could thus exclude bids that have a large share of European content. This is not just external protectionism: it threatens the EU's single market.

The commission says it is responding to demands from European leaders, at a summit in 2010, for greater “reciprocity” in dealings with the world. But a better form of reciprocity is the mutual opening of markets. Negotiations to liberalise trade are far from hopeless. Last year China made a substantially improved offer to join the GPA. The EU has concluded a trade pact with South Korea and is negotiating with India, Canada and others. And it is thinking about a new accord with America.

Beware the 1930s

A charitable view of the commission's proposal is that it is a nuclear option, never to be used. Another is that it prevents a free-for-all as countries protect their markets, creating instead common rules policed by Brussels. A third is that it creates a safety valve to defuse demands for extreme measures. “We avoid the risk of national protectionism by creating a European mechanism,” says one commission official. “If we do not do it we are going to have real trouble. The liberals do not understand what could happen.”

But the commission is underestimating other dangers. Europe needs more competition, not less, to overcome its crisis. If there is a silver lining in the global financial crisis, it is that the world has so far avoided a 1930s-style protectionist war. The EU should not do anything that could provoke another one.